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Credit Insights

Verizon's Mammoth Deal Will Set the Tone Until Fed Meeting

Portfolio managers are hoarding their cash balances as they keep powder dry to participate in Verizon's massive upcoming debt issuance following its buyout of Vodafone's wireless stake.

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While the average spread in the Morningstar Corporate Bond Index tightened 3 basis points to +147 last week, the corporate bond market did not feel as healthy as the tightening index spread would indicate. Evidence of the skittishness was apparent in both the new issue market and secondary trading. The concessions required to price new issues were unusually wide, and even then, many of these deals traded in the secondary market at or behind where the new bonds were priced. 

With interest rates rising and bond prices falling, many traders have been gun-shy about purchasing long-dated bonds and are waiting for rates to even out. In addition, portfolio managers are hoarding their cash balances as they keep their powder dry in order to participate in  Verizon Communications(VZ) (rating: BBB, narrow moat) massive upcoming debt issuance, and they are also dealing with redemptions as individual investors have been pulling money out of fixed-income funds. With the Fed's reduction of quantitative easing looming over the market, potential military intervention in Syria, weakness among emerging-markets economies and currencies, and pending debt ceiling and budget battles in Washington, investors are contending with an unusually wide range of near-term risks.

David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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